ZTE Net Profit Up 30% in First Half

Bouncing back from its showdown with US authorities, China's ZTE has revealed that its net profit for the first six months of the year is likely to be nearly 30% higher than in the first half of 2016 thanks to growth at its network infrastructure and mobile device businesses.

The update comes after US authorities slapped the Chinese vendor with a fine of nearly $900 million earlier this year after accusing it of violating trade sanctions by selling gear in Iran that included components made in the US. (See ZTE to Pay $892M Fine to Settle US Trade Dispute.)

While that fine wiped out profitability in 2016, ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) previously reported year-on-year growth of 27.8% in net income for the first three months of this year, to about 1.2 billion Chinese yuan ($180 million), and said its first-quarter sales were up 17.8%, to RMB25.7 billion ($3.8 billion). (See ZTE Suffers $340M Net Loss on US Fine and ZTE Bounces Back in Q1 After US Trade Fine.)

The latest guidance indicates that ZTE has maintained its momentum and means net profit is up to about RMB2.29 billion ($340 million) for the first half, with sales rising 13.1% to RMB54.01 billion ($8 billion), compared with the year-earlier period.

In a statement, ZTE said it had seen growth "in operations including wireless network, wireline network and bearer network, in addition to handsets, with improvements in gross profit margins."

The performance is in stark contrast to that of Swedish rival Ericsson AB (Nasdaq: ERIC), which earlier this week said its revenues had fallen by 9.4% in the first half, to 96.3 billion Swedish kronor ($11.6 billion), compared with the year-earlier period. (See Ericsson Shares Slump on Gloomy Q2 Update.)

Unlike ZTE, however, Ericsson no longer maintains a handset business. And while ZTE sells network equipment across fixed and mobile markets, Ericsson is heavily focused on the radio access networks sector. It currently expects sales in that sector to shrink at a "high single-digit" percentage rate this year, having previously guided for a decline of between 2% and 6%.

Yet to report second-quarter results, Finland's Nokia Corp. (NYSE: NOK), which sells a range of network equipment but also lacks a handset division, has been guiding for a decline of about 2.2% in its main addressable market this year.

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China's Huawei Technologies Co. Ltd. , the world's biggest supplier of network equipment to communications service providers, has also issued a warning that conditions in infrastructure markets are getting tougher.

While sales at its carrier networks business rose about 24% in 2016, rotating CEO Eric Xu told Light Reading in March that achieving a growth rate of "even" 10% in future would be challenging. (See Huawei's Sales Soar but Profit Growth Grinds to a Halt and CEO Interview: Huawei's Eric Xu.)

That would still look dazzling by comparison with current growth rates at Ericsson and Nokia, which saw its net sales shrink by 4% in the first three months of the year, to about €5.4 billion ($6.2 billion), compared with the year-earlier period. (See Nokia Turnaround Gathers Pace, Shares Rise.)

The perception is that the Chinese companies have continued to grab market share from their Western rivals.

Both Huawei and ZTE have been locked out of opportunities in the US market, where policymakers have described them as a potential security threat, but they have built relationships with most of Europe's network operators and taken leadership positions in various emerging markets.

Those obviously include the vast Chinese market, where they have claimed the majority of 4G contracts with China's three big national operators and look poised to benefit from investments in 5G infrastructure in the next few years.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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